Money Matters

How to calculate mark-up percentage

Mark-up percentage is the amount you increase the price of an item beyond its cost to make. Here's how it works and why it matters for your business.

Success in retail means finding your ideal selling price.

Set the price of products too high, and customers will consider your competition. Set the price too low, and you’re stuck in a loop that never works: Making it up on volume.

As a result, you need to find a balance between what it costs your company to make an item, and what you will price the item to make a profit.

The gap between these two prices is known as the mark-up. You then use those figures to calculate the mark-up percentage.

Here’s what you need to know about how mark-up percentages work, why they matter, where you should set your mark-up percentage, and how to calculate this value.

What is mark-up percentage?

Your mark-up percentage is the amount (expressed as a percent) that you increase the price of an item beyond its total cost to make.

Say an item costs \$5 to make and its total cost to buy is \$7.50. That’s a mark up of \$2.50. This \$2.50 represents 50% of the total cost of the item, which means it is a 50% mark-up percentage.

Why is mark-up percentage important?

Mark-up percentage is what makes you profit.

Consider an item sold at cost for \$5. While you’re not losing any money, you’re not making any money, which means you’re not staying in business.

In addition, mark-up percentage only accounts for your gross profit, which is calculated before expenses such as labour and overheads.

This means that while selling a \$5 product for \$7.50 gives you a \$2.50 gross profit, you still need to pay your staff, pay your rent, pay for utilities, etc.

Subtracting these expenses from your gross profit gives you your net profit, which is what you actually walk away with after a sale.

For example, if your average per-unit expenses are \$3 per item but you’re only making a gross profit of \$2.50, you’re losing money for every item sold. As a result, a 50% mark-up percentage isn’t enough to ensure a net profit, meaning you should consider increasing your mark-up percentage.

What is a good mark-up percentage?

While there is no universal mark-up percentage, the most common percentage used in retail is 50%.

Mark ups do change over time—as noted by data from Statistics Canada, the average retail mark up increased 2.6% between 2018 and 2022.

It’s also worth noting that the type of items you sell may impact your potential mark-up percentage.

For example, retail clothing brands tend to have mark ups between 50% and 100%, while luxury items such as jewellery or rare foods may have mark ups of 1,000%, 2,000%, or more, in part because wealthy consumers tend to be less price sensitive.

Food in restaurants may see mark ups between 200% and 400%, but these higher values are largely due to the overhead expenses of paying workers to prepare this food.

On the other end of the scale, businesses such as grocery stores may have extremely small mark ups on some items, often in the 1% to 3% range.

In part, this is because of the volume of items they sell, and in part, because not all items in the store are sold at this mark up—some will have much higher mark ups to help offset potential losses.

Put simply, the ideal mark-up percentage is one that keeps customers happy and keeps your business profitable.

While higher mark ups mean more profit, it’s a good idea to conduct market research before raising mark ups, especially if you are in a competitive market.

For example, if you choose to increase your mark up from 50% to 100% but there are similar items on the market at a lower price from your competitors, you may lose business.

Depending on how many customers you keep, this may still be a net gain. But consider this move carefully before taking action.

There may also be situations where you need to raise your mark-up percentage to remain profitable.

Common examples include increased material or shipping costs, or increases to expenses such as labour or rent.

In this case, your goal isn’t to increase your overall profit but rather to ensure that it remains the same.

To help reduce the risk of customer churn, make sure to communicate with customers why you’re making the change and what this means for your business. Although some customers may still leave, you can prevent large-scale losses by being upfront about price changes.

How do you calculate mark-up percentage?

To find your mark-up percentage, divide an item’s gross profit by its total cost.

Gross profit is found by subtracting the item’s cost from its price. To convert this number to a percentage, multiply the value by 100.

Here’s what it looks like on paper:

Mark-up percentage = [price – cost] / cost x 100

Consider the example above, where price = \$7.50 and cost = \$5. If we plug those numbers into our formula, we get [\$7.50 – \$5] / \$5 x 100. Doing the math gives us a 50% mark-up percentage.

If you have a mark-up percentage in mind and want to know how that will impact the price, use this formula:

Price = cost x [mark-up percentage/100] + cost

Let’s say you’re considering a 70% mark-up cost on the \$5 item above. To find out how this affects the price, we simply input those numbers into our formula, like so: \$5 x [70% / 100] + \$5. This gives us an answer of \$8.50, which means the new cost of the item at a 70% mark up is \$8.50.

While it’s possible to calculate mark-up percentages by hand, make your life easier with a mark-up calculator — simply input your costs, prices, or percentages to find the other values.

Tips for managing mark ups

When it comes to mark-ups, there’s no one-size-fits-all for every business. Here are three tips to help you make the most of mark ups.

1. Aim for balance, not big profits

The higher the mark up, the bigger your profits.

But larger mark ups carry risk—if customers can find similar products for a lower price, brand loyalty won’t last long.

As a result, you’re looking for balance. Mark ups should be enough to help grow your business, but not so much that customers feel value and cost aren’t aligned.

If your goal is to successfully increase mark ups, two components are critical: reputation and quality.

If your brand has a reputation for superior customer service and delivers products that are above-average quality, you may be able to charge more than the competition.

Take time to improve in these two areas before rolling out bigger mark ups.

2. Consider the competition

According to data from the International Trade Administration, 75% of the Canadian population used e-commerce in 2022.

As a result, it’s easier than ever for shoppers to compare products and prices across multiple brands before making a purchase.

This means it’s in your best interest to consider competitor mark ups before setting your own.

While you may not be able to find exact data, you can make an educated guess for similar products, and ensure your mark ups are in the same ballpark.

3. Regularly review mark ups vs total costs

Costs aren’t static. Materials, logistics, labour, and physical costs have all increased significantly over the past few years.

While the pace of increase seems to be slowing, the trend remains upward. This means that over time, the gap between product cost and mark-up price will narrow.

To help avoid selling at a loss, make sure to regularly review both your mark-up percentages and total costs.

If an increase is warranted, communicate the change to customers and give them some lead time before raising the price.

Final thoughts on calculating mark-up percentage

Mark-up percentage plays a critical role in business profitability.

Finding the right mark-up helps keep customers coming back while keeping your company in the black, while regular review of mark-ups lets you stay in line with market expectations.